Venture financing for Israeli startups is taking its toll

Investment in Israeli startups has picked up significantly after a sharp decline less than a year ago due to Hamas attacks and Israel’s response.

Funding for Israeli startups fell in the fourth quarter of last year as uncertainty grew along with rising tensions and violence. But less than a year later, with tensions in the region still high, venture capital funding for VC-backed companies has picked up again — and is even showing some signs of growth.

In the second quarter of this year, funding for startups in the region (startups based in the country) came in at just under $1 billion, according to Crunchbase data. Funding in the region hasn’t reached $1 billion or more since the third quarter of last year, when startups received a staggering $1.6 billion. In fact, funding in the second quarter was all but dead, even with the numbers coming in from the second quarter of 2023.

Just after the end of the third quarter, the region was gripped by violence, and startup funding barely reached $500 million.

However, the country has seen two consecutive quarters of funding growth, with the current quarter expected to bring in just over $1 billion.

Not what you think

These numbers are interesting for several reasons, not the least of which is the fact that conflict is still ongoing in the region.

Still, startups were apparently still able to secure money — in some cases, a lot of it. The largest rounds this year for VC-backed startups in Israel include:

• In June, InSightec, a developer of ultrasound devices for image-guided acoustic surgery, raised $150 million in a private equity funding round.
• In April, Israeli AI chipmaker Hailo raised $120 million to extend its Series C round that gave it unicorn status in 2021.
• Fetcherr, a company that uses AI to power real-time dynamic pricing in the airline industry, raised $90 million in Series B funding in June.
• Finally, MagnusMetal, which creates digital casting solutions for metal alloys, raised $74 million in a Series B round in April.

It is noteworthy that none of these rounds concerned the industry most associated with the startup scene in Israel – cybersecurity.

According to Crunchbase data, VC-backed cybersecurity startups raised just $66 million in the second quarter, while other sectors like enterprise software and — of course — generative AI stepped up their fundraising efforts.

The largest round raised by an Israeli startup in Q2 went to browser security firm LayerX, which raised $26 million. In the current third quarter, cloud security firm CTERA has already raised $80 million.

There is more

In addition to these unexpected circumstances, it is also worth noting that Asia is at its lowest point in nearly a decade in terms of venture capital funding, meaning that Israeli startups are bucking another trend.

Finally, while dollar amounts are rising, deal flow remains low for the region, with only about 50 to 60 rounds announced each quarter. Early last year and even before, deal flow for the region was typically around 120 to 130 funding rounds announced each quarter.

These numbers suggest that Israeli startups are receiving large and medium-sized funding rounds to compensate for the lower number of closed rounds, but perhaps seed and very early-stage companies are struggling to raise cash — which could pose a future problem for the overall health of the startup ecosystem in the region.

Still, the resilience of Israel’s venture and startup industry is striking given everything else that’s still going on in the region. When the fighting broke out, investors and founders insisted that the region’s entrepreneurial spirit and innovation would endure.

The numbers seem to confirm that these words are prophetic in nature.

Methodology

Companies are considered to be domiciled in Israel only if their registered office is still in Israel. Companies founded in Israel that have since moved their registered office elsewhere are not included in this data.

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Illustration: House of Guzman